SHANTHALA FMCG PRODUCTS LIMITED | IPO Analysis

Shanthala FMCG Products Limited, formerly known as Shanthala Traders Private Limited, has a rich history and a strong presence in the distribution business. The company's journey began with two proprietary firms: M/s. Shanthala Enterprises, managed by Mrs. Sharada Malya, and M/s. Shanthala Traders, headed by B. Manjunath. M/s. Shanthala Traders was founded in 1996, with a steadfast commitment to delivering high-quality products to customers within specified timeframes.

On 17th October, 2023 Shanthala FMCG Products Limited officially issued its Prospectus mentioning the important details regarding its recent Initial Public Offering (hereinafter referred as IPO) which will start from Friday, 27 October, 2023 and closes on Tuesday, 31October, 2023. Before delving deeply into the details of the IPO. Let us briefly look at the Business Operation of ‘Shanthala FMCG Products Limited.’

ABOUT BUSINESS OPERATION

Shanthala FMCG Products Limited, formerly known as Shanthala Traders Private Limited, has a rich history and a strong presence in the distribution business. The company's journey began with two proprietary firms: M/s. Shanthala Enterprises, managed by Mrs. Sharada Malya, and M/s. Shanthala Traders, headed by B. Manjunath. M/s. Shanthala Traders was founded in 1996, with a steadfast commitment to delivering high-quality products to customers within specified timeframes.

In 2014, Shanthala Traders Private Limited was established, and the entire business of M/s. Shanthala Traders, the proprietary concern, was seamlessly transferred to the company. This transition marked the discontinuation of the proprietary firm's operations. The newly formed company, Shanthala Traders Private Limited, was dedicated to bridging the gap between large consumer product companies and their customers, ensuring the efficient distribution of top-notch global products. While Shanthala Traders Private Limited continued its operations, M/s. Shanthala Enterprises under the proprietorship of Mrs. Sharada Malya ventured into the distribution business in a different geographic region, namely Kushal Nagar.

Over time, Shanthala Traders Private Limited underwent significant transformations. It was initially incorporated as Shanthala Traders Private Limited in 2014 under the Companies Act, 1956, with the Registrar of Companies in Bangalore. Subsequently, the company's name transitioned to Shanthala FMCG Products Private Limited, as indicated in the certificate of incorporation issued on April 24, 2023, by the Registrar of Companies, Bangalore.

Notably, the company's status evolved to that of a public limited entity, and its name was updated to Shanthala FMCG Products Limited. This transformation was executed through a Special Resolution dated June 12, 2023, aligning the company with the status of a public limited company. A fresh certificate of incorporation was duly issued on July 10, 2023, by the Registrar of Companies, Bangalore, marking this pivotal milestone.

PRODUCTS AND SERVICES

The company specializes in the distribution of a diverse range of FMCG (Fast-Moving Consumer Goods) products in India, partnering with both prominent domestic FMCG companies and major FMCG multinational corporations. Their distribution services encompass a wide array of product categories, ensuring that customers have access to essential and quality products. Their portfolio includes the distribution of branded packaged foods, personal care products, education, and stationery items, matches and agarbatti (incense sticks), and tobacco products for some of India's leading FMCG companies. This comprehensive selection caters to various consumer needs, from daily essentials to personal preferences.

Additionally, they serve as distributors for one of the largest FMCG multinational companies operating in India. With this partnership, they distribute a range of branded products spanning beauty and well-being, nutrition, personal care, and home care. These offerings reflect their commitment to providing customers with a wide array of choices for their diverse requirements. Furthermore, they proudly distribute essential commodities such as oil, sugar, and atta (flour) for M. K. Agrotech Pvt. Ltd., featuring their trusted brand, Sunpure. These kitchen staples are essential elements of many households, and their distribution ensures that customers have access to quality products under a recognized brand. Brief description of the company’s products can be observed from the following table.

BOARD OF DIRECTOR AND PROMOTERS OF THE COMPANY

The Board of Directors at Shanthala FMCG Products Limited comprises a dedicated and diverse group of individuals, each contributing their expertise to guide the company's strategic direction and decision-making.

At the helm is B. Manjunath Mallya, who holds the position of Chairman & Managing Director, providing strong leadership and direction to the organization. Assisting in the executive management of the company is Shobitha Malya, who serves as the Executive Director, contributing to the company's operational excellence.

The board also includes distinguished Non-Executive and Independent Directors, each bringing their unique perspectives and insights to the table. Smita Arjun Patil, Ravikant Moreshwar Mhatre, and Shivani Shivshankar Tiwari hold these important positions, offering valuable independent oversight and strategic counsel to ensure the company's governance and decision-making align with the highest standards.

The individual Promoters of the company includes B. Manjunath Mallya, Shobitha Malya, Sneha Vinayak Kudva and Yogish Mallya. Together, these individual promoters have played a crucial role in steering Shanthala FMCG Products Limited toward its current position in the FMCG distribution sector, exemplifying their commitment to the company's growth and success.

INDUSTRY OUTLOOK

The Fast-Moving Consumer Goods (FMCG) sector in India has witnessed significant growth, driven by a variety of factors. This sector, known for its consumer-driven expansion and rising product prices, especially in the essential goods category, has become a crucial contributor to India's economy. With around 3 million people employed in this sector, accounting for approximately 5% of India's total factory employment, FMCG has played a vital role in job creation. The FMCG industry's sales were expected to grow by 7-9% in terms of revenues in 2022-23. Several key growth drivers have propelled this expansion, including favourable government initiatives and policies, the growth of the rural market, the increasing youth population, the introduction of new branded products, and the rise of e-commerce platforms.

The FMCG sector is India's fourth-largest industry and has been thriving due to factors such as rising disposable incomes, a youthful demographic, and increasing consumer awareness. Household and personal care products constitute 50% of FMCG sales in India, making this industry a significant contributor to the country's GDP. India's vast middle-class population, larger than the entire population of the USA, makes it a market that no FMCG player can afford to ignore. The FMCG market in India continues to expand as more people move up the economic ladder, benefiting from economic progress. Government initiatives to enhance financial inclusion and establish social safety nets have further accelerated this growth. Increased awareness, easier access to products, and changing lifestyles have been pivotal drivers for this sector. While the urban segment remains the largest revenue contributor, the FMCG market has experienced faster growth in rural India in recent years. Semi-urban and rural segments are growing rapidly, with FMCG products accounting for a significant portion of total rural spending. As of December 2022, the FMCG market reached US$ 56.8 billion.

The retail market in India is projected to reach US$ 1.1 trillion by 2020, with modern trade expected to grow at an annual rate of 20-25%, which is likely to boost FMCG company revenues. The FMCG market in India is anticipated to increase at a Compound Annual Growth Rate (CAGR) of 14.9%, reaching US$ 220 billion by 2025, up from US$ 110 billion in 2020. The Indian processed food market is also on an upward trajectory, projected to expand to US$ 470 billion by 2025, up from US$ 263 billion in 2019-20. The industry's landscape is evolving, with both established companies and nimble start-ups vying for market share, reflecting the dynamism of the FMCG sector in India.

COMPETITION

The company operates in the highly competitive FMCG (Fast-Moving Consumer Goods) market, facing intense competition, with the primary battleground being the quality of service, on-time delivery, and competitive pricing of its products and services. To maintain its competitiveness, the company is committed to enhancing its sales and marketing strategies, optimizing operational costs, and improving overall efficiency. The ability to sustain its strengths is paramount, as any lapse in these areas could result in the company's competitors gaining an upper hand, leading to a potential erosion of its market share and adverse impacts on its operational results. The company's competitors, some of whom may have superior capitalization, longer operating histories, stronger brand presence, and more robust management, pose a significant challenge.

Effective management of the company's business is essential to maintain its competitive position and profitability. The company is proactive in its approach and plans to compete vigorously, seeking to expand its market share and bolstering its management team to effectively navigate its growth journey. In the evolving landscape of the FMCG market, the potential for new entrant looms on the horizon. These newcomers may already possess well-established business networks, representing a new dimension of competition. Some of the company's competitors are larger entities with greater financial resources, enabling them to offer products and services on more favourable terms or invest more substantial capital in their operations, including bolstering their marketing and delivery capabilities. The company's commitment to remaining agile, innovative, and responsive to market dynamics is key in navigating the challenges and opportunities presented by the competitive FMCG market.

FINANCIAL ASPECT

When considering an investment in a company, investors invariably scrutinize the Key Financial Indicators to make informed decisions. Among these, Revenue from Operationsstands out as a pivotal figure. Notably, in the Financial Year 2022-23, Shanthala FMCG Products Limited has generated a remarkable revenue of INR 4,051.59 (in Lakhs). And in the FY 2021-22 it had a revenue of INR 3,225.87 (in Lakhs). Their profit for the FY 2022-23 stands at INR 17.73 (in Lakhs). If we delve deeply into the finances of the SHANTHALA FMCG PRODUCTS LIMITED, the company's other income for the fiscal year 2023 amounted to ₹25.66 lakhs, while in the previous fiscal year 2022, it stood at ₹28.70 lakhs. This category primarily encompasses earnings from room rent for the company's leased property, income from marketing and support services, fixed deposit interest, and an insurance claim recorded during the fiscal year 2022. In terms of overall financial performance, the company's total income for the fiscal year 2023 reached ₹4,077.25 lakhs, showing a notable increase from the previous fiscal year 2022, where it was ₹3,254.57 lakhs.

For a comprehensive understanding of the financial aspects of Shanthala FMCG Products Limited, the following table provides valuable insights of financial ratios for a comprehensive assessment of the company's financial condition and performance.

OBJECTIVE OF THE IPO

The company intends to utilize the Net Proceeds from the Fresh Issue for the following purposes:

1. Funding Additional Working Capital Requirements: Given the working capital-intensive nature of the company's business, a significant portion of its working capital needs is typically met through banking institutions, financial entities, and internal accruals. For future working capital requirements, the company plans to allocate ₹1,150 lakhs from the Net Proceeds, which will be utilized during Fiscal 2024 and Fiscal 2025 to support its ongoing operational needs.

2. General Corporate Purposes: The remaining balance of the Net Proceeds, amounting to ₹400.00 lakhs, will be directed towards general corporate purposes. These purposes encompass various activities essential for the company's growth, including financing growth opportunities, strategic initiatives, joint ventures, partnerships, marketing and business development expenses, facility expansion, and covering exigencies and expenses incurred in the regular course of business.

The company believes that its listing on the Emerge Platform of NSE will enhance its corporate image, increase the visibility of its brand, and deliver several benefits. These include providing liquidity to existing shareholders and creating a public trading market for its Equity Shares. In addition to the utilization of Net Proceeds for working capital and general corporate purposes, the total expenses related to the Offer are estimated to be approximately ₹57.42 lakhs. These expenses encompass various aspects, including underwriting and management fees, printing and distribution costs, advertising expenses, and legal fees where applicable. 

IMPORTANT DATES

DETAILS OF THE IPO

Shanthala FMCG Products Limited has launched an Initial Public Offering (IPO) comprising 17,66,400 Equity Shares, each with a face value of ₹10.00. The offering price for each Equity Share is ₹91.00, which includes a share premium of ₹81.00 per Equity Share. In total, this IPO is set to aggregate ₹1,607.42 lakhs. Of the total Equity Shares on offer, 88,800 Equity Shares, each with a face value of ₹10.00, priced at ₹91.00 per Equity Share and aggregating ₹80.81 lakhs, are reserved for Market Makers. The Net Offer to the Public consists of 16,77,600 Equity Shares, each with a face value of ₹10.00, priced at ₹91.00 per Equity Share and aggregating ₹1,526.62 lakhs.

Within this Net Offer to the Public, there are two separate allocations:

Here are the minimum and maximum application sizes for different categories of investors:

MINIMUM APPLICATION

For QIB and NII: Investors can apply for a minimum of such number of Equity Shares in multiples of 1,200 Equity Shares at an Issue price of ₹91 each, with the condition that the Application Value exceeds ₹2,00,000.

For Retail Individuals: The minimum application size is 1,200 Equity Shares at an Issue price of ₹91 each.

MAXIMUM APPLICATION

For QIB and NII investors, the maximum application size is the Net Issue to the public, which is 16,77,600 Equity Shares, subject to the limits that the investor must adhere to under the relevant laws and regulations.

For Retail Individuals, the maximum application size is 1,200 Equity Shares at an Issue price of ₹91 each.

RISKS INVOLVED

The company is exposed to various risks that could potentially impact their business, financial condition, and operational results:

1. Legal Proceedings: There are ongoing legal proceedings involving Promoter and Promoter Entities that may have adverse effects on business, financial situation, and operating results. These proceedings demand management's time, attention, and financial resources.

2. Compliance with Health and Safety Regulations: Their operations, particularly the distribution of FMCG products, including tobacco, are subject to stringent health and safety laws and regulations. Compliance with these industry-specific regulations can lead to additional costs and liabilities that are inherent in business.

3. Industry-Specific Regulations: They are subject to central, state, and local laws and regulations related to food safety, consumer goods, health, safety, and other areas. These regulations pertain to food safety, ingredient and packaging requirements, contamination investigation, and remediation.

4. Reliance on Third-Party Manufacturers: The company rely on third-party manufacturers and suppliers to produce the products they distribute. If these manufacturers or suppliers are unable to meet their requirements or comply with relevant regulations, it could negatively impact the business.

5. Lack of Long-Term Contracts: Operating primarily based on purchase orders without long-term contracts can potentially impact the revenues and profitability.

6. Working Capital Requirements: Their operations require substantial working capital. Failure to maintain an optimal level of working capital may adversely affect the operations.

7. Key Management Personnel: The key role played by the Promoter and Managing Director, B. Manjunath Mallya, is critical to business. The company’s success depends on the ability to attract and retain key managerial personnel. The loss of such individuals could have adverse effects on the business, operations, and financial condition.

8. Registrations and Permits: Their business necessitates obtaining and renewing various registrations, licenses, and permits from government and regulatory authorities. Failure to do so in a timely manner can adversely affect the business operations.

9. Competition: As the company operate in a highly competitive industry, their revenues, profits, or market share may be harmed if they are unable to effectively compete.

10. Promoter Group Entities: Entities within Promoter Group have similar business objectives. The absence of non-compete agreements may lead to potential conflicts of interest or increased competition, which could adversely affect the business operations and financial condition.

11. Interest Rate Fluctuations: Risks stemming from interest rate fluctuations may adversely affect company’s operational results, planned expenditures, and cash flows.

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